AMD and Nvidia among the most overbought stocks on Wall Street amid AI craze

Artificial Intelligence (AI) has been one of the most talked-about technologies of recent times. AI has grown tremendously and made its way into every industry from healthcare to finance, manufacturing, transportation, and more. The demand for computer chips to power AI applications has also increased exponentially. With the surge in demand, chip manufacturers AMD and Nvidia's stocks have skyrocketed, making them among the most overbought stocks on Wall Street.

AMD and Nvidia - Overbought Stocks

The stock prices of chip makers AMD and Nvidia have been on the rise for months. As of May 2021, AMD's stock price had risen by over 62% year-to-date, while Nvidia's had soared by more than 62%. As of July 2021, the two companies had a market capitalization of around $100 billion and $500 billion, respectively. These numbers make the chip-making duo among the most valuable companies in the computer hardware industry.

In simple terms, overbought stocks are considered overvalued compared to their fundamentals and are generally at a high risk of a price decline. Investors are often motivated by a fear of missing out on opportunities, leading them to buy overvalued stocks just because the market sentiment is bullish. With the AI industry's explosive growth, investors are rushing to invest in AMD and Nvidia without proper consideration of the risks.

The AI Craze - Investing in Chip Stocks

Artificial Intelligence is big business, and the industry is expected to continue its rapid growth in the coming years. A report by Accenture suggests that AI could add $1.2 trillion to the U.S. economy by 2035. With such a significant potential for investment returns, investors are pouring funds into chip manufacturers who make the AI technology possible.

Investors' optimism in the AI industry has led to an astronomical rise in chip-maker stocks, such as AMD and Nvidia, causing them to be overbought. This situation has investors worried about a possible bubble burst, resulting in financial losses. The market fundamentals may not justify the current stock prices, and investors must carefully consider their options when investing in such companies.

When to Invest in Overbought Stocks?

As a responsible investor, it is essential to weigh the risks and benefits of investing in overbought stocks. Despite this, there could still be an opportunity to invest in such stocks with caution. The following are some of the measures investors can explore when considering whether to invest in technology-making companies that seem overbought:

• Understanding the company's fundamentals that drive market growth: Investors need to research and understand how the company makes money, the competition, and the demand for the products.
• Stock valuation: Assessing the stocks' valuation by analyzing metrics like price-earnings growth ratios, discounted cash flow, and historical charts, among others, can provide insight into the right time to invest.
• Setting a stop-loss order: In case the stocks collapse unpredictably, it is essential to have a plan. A stop-loss order can help the investor mitigate losses by automatically selling the stock at a predetermined price.

Conclusion

The growth of the artificial intelligence industry continues to attract investors globally. Companies like AMD and Nvidia have been at the forefront in providing the necessary computer chips that fuel AI applications. However, the bullish sentiment and investor frenzy have created a situation where these stocks are overbought and overvalued relative to their fundamentals. With the current stock prices and market trends, investors must approach these stocks with caution and evaluate their options carefully before investing.